Analysts at Wedbush remained confident that Microsoft Corporation (NASDAQ:MSFT) can ride out the economic storm after the market gave the thumbs down to Tuesday’s first quarter results.
However, the broker reduced its price target and lowered estimates after the tech giant gave weaker than expected December guidance across the board with Azure growth expected to be in the 37% constant currency range (vs. 42% this quarter).
The news sent shares in the company down 6%, denting what Wedbush called the “Teflon-like” aura of the past few quarters “as the Street held its breath every quarter to see if there were cracks in the Redmond armor.”
READ: Microsoft tops expectations despite slow down in cloud growth
The cracks finally appeared as Wedbush said the guidance was “nothing to write home about” and will “weigh on the shares.”
In a note, the broker explained the PC industry is going through a tsunami-like period and there is no surprise that the company is seeing weakness on this front going forward.
The biggest surprise was that core Azure/Office 365 implied growth was reduced (more than expected), reflecting a slowdown in enterprise spending. However, while FX headwinds of around 500 bps are skewing this underlying weakness, “there is no rose colored glasses that the core cloud growth engine is starting to slow,” Wedbush said.
“Now the Street needs to discern is this just the first shoe to drop for Microsoft or a rip the band-aid off moment and the stock moves higher from here” the broker stated.
Wedbush remained positive, it believes that the cloud and underlying Office 365/Windows ecosystem is going to comprise a bigger and bigger piece of Redmond going forward and will ultimately spur growth and margins into FY23/ FY24 despite this downturn.
The shift to cloud is still less than 50% penetrated and represents a massive opportunity going forward, it said, noting that conversations with customers and partners underscored this confidence.
Share price weakness is a buying opportunity
Wedbush recommended using today’s weakness in the share price as a buying opportunity believing this is a resetting of expectations and not the start of a multi-quarter painful guidance reduction cycle.
The broker kept its outperform rating but lowered its price target from $320 to $290 reflecting its reduced estimates.
For quarter two Wedbush now forecasts revenue of $52.86 billion, down from $56.81 billion, with pro-forma EPS now seen at $2.28, down from $2.67.
The broker also lowered full-year 2023 revenue forecasts to $217.7 billion from $226.06 billion giving EPS of $9.94, down from $10.64.
Contact the author at jeremy@proactiveinvestors.com